June 24, 2024

Used Car Dealer Carvana Reaches Debt Restructuring Deal

Troubled used car retailer Carvana announced on Wednesday it had reached a debt restructuring deal with most of its bondholders in an effort to lower interest payments over at least the next two years and turn its business around a more solid financial base.

The once fast-growing company, which sells cars online and at prominent parking garages scattered across the country, thrived during the pandemic when demand for cars rose and many people were happy buy them sight unseen. But Carvana took on a lot of debt, made a big acquisition and was unprepared for falling used car prices and rising interest rates.

Carvana said its restructuring deal covered more than $5 billion of senior, unsecured bonds and included the participation of Apollo Global Management, its largest bondholder. Under the terms of the deal, creditors will receive new secured notes.

Interest on that new debt will be paid in kind for the next two years, meaning Carvana’s principal will grow but the company won’t have to make about $430 million in cash interest payments. The new debt will also be due later than the old notes.

“This transaction significantly increases our financial flexibility by reducing our total debt, extending maturity, and lowering near-term cash interest expense as we continue our plan to drive significant profitability and to complete a return to growth,” the company’s chief financial officer, Mark Jenkins. , said in a statement.

Carvana also reported on Wednesday that it lost $105 million in the second quarter, an improvement on the $439 million it lost in the same period a year ago. The company said retail sales of used vehicles fell 35 percent, to 76,350 cars and trucks. But the average gross profit per vehicle sold nearly doubled to $6,520. Carvana said it has reduced costs by more than $1 billion since the start of 2022.

The company’s stock, which traded around $4 a share in December, has rallied in recent months on signs its ailing business was improving and hopes the company and its creditors could pay off its debt. to restructure without resorting to bankruptcy. The stock closed Tuesday at $39.80, a far cry from its share price of more than $300 in the summer of 2021.

The debt restructuring covers more than 90 percent of Carvana’s $5.7 billion in unsecured notes. Holders of about $5.2 billion of those notes agreed to the deal, which entitles them to $324 million in cash and new notes secured by real estate and other assets. The other creditors holding the old notes will be given the opportunity to join the debt restructuring agreement, the company said.

After two years, the new bonds will pay a 9 percent cash coupon. The new notes will mature in 2028; the senior notes will mature in 2025 and 2027.

“Apollo is pleased to support this debt swap agreement, which will significantly strengthen Carvana’s financial position while providing new first debt to creditors,” John Zito, Apollo’s deputy chief credit investment officer, said in a statement.

At the end of 2022, as Carvana’s financial problems worsened, the old bonds fell to just 40 cents on the dollar, suggesting that many investors feared the company would default on the debt.

In conjunction with the bond transaction, Carvana will issue approximately $350 million in new stock. The company’s two largest shareholders – its chief executive, Ernie Garcia III, and his father, Ernie Garcia II – have agreed to buy up to $126 million of those new shares.

Apollo has long been a believer in the company’s business model. Last year, as Carvana struggled to raise new debt, the giant investment manager pledged nearly half of $3 billion in bonds, in a show of confidence.

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